FedEx Corp. (FDX) and United Parcel Service Inc. won licenses to start domestic courier businesses in some Chinese cities, as they push to expand in the world’s most populous nation.
FedEx, the world’s biggest cargo airline, can begin service in eight cities, while Atlanta-based UPS’s license is for five, according to the companies. The businesses don’t include letter delivery.
They will compete in a local courier business dominated by state-owned China Postal Express & Logistics Co., which has about 30 percent of the market. The licenses will help Memphis, Tennessee-based FedEx and UPS benefit from rising demand driven by online shopping.
The approval “sets the platform for eventual consolidation and market-share gain opportunity,” said Nate Brochmann, an analyst at William Blair & Co. “We’re still in the very early innings in terms of the domestic Chinese opportunity. For the most part it doesn’t change the competitive landscape there.”
The licenses let both companies serve Shanghai, Guangzhou, Shenzhen and Tianjin, according to spokesmen for FedEx and UPS. (UPS) In addition, FedEx was approved for Hangzhou, Dalian, Zhengzhou and Chengdu, while UPS can also operate in Xian.
The approval is a starting point for long-term growth in China and will help the companies improve network efficiency, said Brochmann, who is based in Chicago and rates the shares of FedEx and UPS outperform. UPS and FedEx will be able to handle deliveries under the licenses “from end to end” instead of using a local partner, he said.
UPS, the world’s largest package-shipping company, expects China’s State Post Bureau will continue its review for more cities in the months ahead because approvals are done in batches, Mark Dickens, a spokesman, said in an e-mail.
FedEx has been working to gain its own domestic operating licenses in China for about three years, said Shea Leordeanu, a spokeswoman, said in a telephone interview.
“Based on our customer demand, there is a clear need for fast and reliable domestic express service in China, and that goes hand in hand with China’s rapid development,” she said.
UPS rose 0.6 percent to $73.05 at the close in New York, while FedEx gained 0.7 percent to $87.96.
FedEx entered China in 1989 by buying the Flying Tigers freight airline to gain routes to 21 Asian countries. In 2007, FedEx spent $400 million to take over a joint venture with Tianjin Datian W. Group Co., which offered access to China’s domestic market.
Licenses to work domestically in Chinese cities align with the companies’ long-term strategies to expand in the region, said Ben Hartford, an analyst at Robert W. Baird & Co. in Milwaukee who rates FedEx and UPS outperform.
“They both recognize the size of the Asia market broadly,” he said. “At the same time, it’s much less mature than the parcel markets in the U.S. and in Europe. It’s going to take time to build the networks.”